How To Generate Enough Wealth To Free Yourself From Work, Long Before Retirement Age.
Are you spending the best years of your life trapped in a soulless cubicle? Do you struggle to save money or make ends meet? Perhaps you’re overwhelmed by debt and just don’t know how to get ahead.
This is exactly how millennial Grant Sabatier felt when he was 24. Just five years later, he’d freed himself from the need to work ever again. Grant achieved this without gambling or receiving a massive inheritance. He developed a financial strategy that would make him financially independent, and he stayed committed to his goal.
In this post, we’ll explore Grant’s strategy, so you can start creating your own roadmap to financial freedom.
To reach financial freedom, you have to defy social norms.
In August 2010, Grant Sabatier was at an all-time low. At the age of 24, he was unemployed and living with his parents. He’d worked hard for three years – nearly five-thousand hours of his life – and had nothing to show for it except $2.26 in his bank account.
When Grant did the math, he realized why it was so difficult for an American millennial like him to save. Factoring in inflation, the average income for his generation was less than half of what it was for his parents. And there were student loan debts to pay off on top of that.
Even if Grant followed the prescribed nine-to-five working life for 40 years, there was no guarantee that he’d be able to retire comfortably. It was a lightbulb moment.
If Grant wanted to escape the drudgery and insecurity of the modern workplace, he’d have to do something radically different.
On that landmark day in 2010, he decided he wasn’t prepared to slave away in a cubicle for the best part of his life. So he set himself an outlandish goal. He would save $1,250,000, which would allow him to retire as soon as possible. That way, he’d have the time he needed to live his ideal life. But to do this, he needed to break the mold that his family and friends fit themselves into.
Grant started by learning everything he could about finance, and changed his perceptions about money. It was not a finite resource to worry about; it was a tool he could use to generate more wealth.
Armed with this new knowledge, Grant developed a strategy to achieve his savings goal. His plan involved working full-time, launching two side businesses and investing in the stock market. It was a demanding way to live, one that meant making sacrifices. But, by 2015, Grant’s wealth had grown from $2.26 to over a million dollars. His savings generated enough interest for him to live off, without needing to work if he didn’t want to. He had reached financial freedom in just five years.
You too can achieve financial independence with Grant’s strategy, which we’ll explore in this post. It will take hard work and commitment. But the compromises you make today will buy you years of freedom in the future.
The first step toward financial freedom is to calculate how much money you spend annually.
Einstein is quoted as naming compounding the eighth wonder of the world. Compounding makes the value of your money increase over time, even if you don’t add another cent to your investment account. This happens because every dollar in your account generates interest. If you don’t withdraw that interest, it generates its own interest, essentially giving you free money!
When Grant decided he wanted to save $1,250,000, it wasn’t because the word “millionaire” had a nice ring to it. It was the minimum figure he needed to invest, so that he could live comfortably off the compound interest. He worked out how much money he needed every year, and then used that as the basis for calculating his savings target.
Each of us has a unique vision of how we want to live our lives. So there’s no universal number to aim for when it comes to finding your savings target. Grant calculated that he needed $50,000 a year to live comfortably in Chicago. But depending on how and where you live, you might need more or less.
To calculate your savings target, start by looking at your current ongoing expenses, like rent or mortgage payments, taxes, utilities, insurance, travel, education, food and entertainment. Work out how much money you need to cover all your annual expenses, then factor in any future plans you have, like having kids, upsizing your home or moving to a more expensive neighborhood.
Next, break out your calculator and divide your annual expenses by 4 percent. The resulting figure is your principal – the amount of money you’ll need to have invested in a compounding account so you can live comfortably off the interest.
So, why 4 percent? Well, this is the sweet spot when it comes to living off your compounded interest. Most interest compounds at around 7 percent. So, if you live off just 4 percent, your investment will keep growing – and you’ve also allowed for inflation. This ensures that you won’t touch your principal, so that it can keep providing your yearly income.
Don’t be intimidated if your savings target is huge. Once you break it down over time, it’ll feel more manageable. Remember: you’re on a journey that’ll take a few years. The magic of compounding is going to help you along the way.
Before you set your financial plan into motion, you must understand your starting position.
Whether you’re heading somewhere special on vacation, launching a new business, or embarking on parenthood, every journey has a starting point. On the path to financial freedom, that starting point is your net worth – or your overall financial value.
When it comes to maintaining financial independence, your net worth is the most important figure. This is because it will guide your financial strategy. It acts as the reference point, telling you how far you have to go before you reach your savings target. Without it, you’re like a boat without a rudder.
To calculate your net worth, begin by looking at your assets. Assets are anything you own that has monetary value, including money in bank accounts and pension funds. Make a list of anything you own that’s worth over $100. Write down how much money you’d get for each item if you sold it. If you sold your $500 couch, for instance, you might get $60. Include everything from your car and any real estate, to artwork and jewelry. Add up the total of your bank balances and estimated sales prices. That figure represents your assets.
Next, calculate your liabilities. Liabilities are the amounts of money you owe, from credit card balances to mortgages and student loan debts. Create a list of all your debts then add up the total amount of money you owe. That figure represents your liabilities.
Now, subtract your liabilities from your assets. The result is your net worth.
Don’t panic if your net worth is a negative number. Grant had $20,000 worth of credit card debt when he started his journey to financial freedom. Factor in your debt by adding it to your savings target. When Grant did that, his $1,250,000 became $1,270,000.
If your net worth is a positive number, that’s great news! Subtract any income your assets generate from your savings target, like rent from a property you own. Start investing this money straight away, so that you’re moving closer to your financial goal.
Spend five minutes of every day tracking your net worth. This may seem like a burden at first. But as your wealth grows, this daily ritual will keep you motivated about saving.
To guide your spending, work out how much of your life you’re trading for every item.
Chances are, you make small comfort purchases every day, like that morning coffee before you hit the office. Often these rituals don’t add up to much, and they inject joy into your day.
But when you’re working toward financial freedom, you have to change the way you value what you purchase. An item’s true cost isn’t its ticket price. It’s the number of hours you have to work so you can buy it. And don’t forget, the ticket price includes tax, but your take-home pay doesn’t. To buy that $3 coffee, you actually have to make $4 pre-tax.
Fifteen dollars a week on small-ticket items like coffee might not be such a big deal. But what about that new outfit, holiday or car? How many hours at the desk will that cost you? And what are you losing in compound interest by making that purchase, instead of investing the money? Once you shift your mindset to seeing items in terms of hours of your life, they’ll begin to look more expensive.
Changing your outlook on purchasing doesn’t mean you have to stop buying things. You just need to understand what the true cost of your purchase is, so you can evaluate whether or not it’s worth it. To do that, you need to calculate your hourly income rate.
Easy right? Surely you just divide your weekly income by the number of hours you work.
Actually, if you do that, you’re selling yourself short. What about all those hours you spend doing work-related things that you don’t get paid for, like commuting, ironing shirts, attending after-hours functions or de-stressing? When you factor that time in, it might significantly reduce your hourly rate.
Once you know how much you earn per hour, you’ll be able to work out the real cost of every item you purchase. Using this figure as a reference point will help reduce your impulse or emotional buying. Instead, you can think about all the compound interest that money will make in your investment account, taking you dollar by dollar toward early retirement.
Cutting back on your housing, transport and food costs will significantly increase your savings.
Budgets are a bit like diets. With temptation lurking in every shop and online store, they’re easy to break. And when you break them, you feel so guilty that you often give up altogether.
The problem with budgets is that they give you the impression that money is scarce – by forcing you to account for every cent. But budgets rarely help you save significantly anyway, since small savings are typically overshadowed by the larger, ongoing costs.
The best way to optimize saving and control spending is to target these large costs. And this means taking a look at the Big Three.
The average American household spends about 60 percent of its income on three main areas: housing, transport, and food. In 2016, this was around $35,000 a year. If households cut this down to 30 percent, they’d have an extra $17,500 a year to invest. Over a twenty-year investment period, this amount would grow to an astonishing $835,000.
Right, so how do you cut back on the Big Three?
Let’s start with number one: housing. Most Americans spend about a third of their income on housing, but you don’t have to. Where possible, downsize or move to a more affordable neighborhood, for a set period of time. A few years in a cheaper home will give your savings a significant boost.
Now for number two; transport. Owning a car is another huge ongoing cost, and it’s not just the purchase price or loan repayments doing the damage. Driving around 15,000 miles a year will cost you an additional $8,000 in gas, maintenance, and insurance.
Public transport or car-sharing options are a great way to dodge those additional expenses. If they won’t work for you, consider a moped or scooter. Not only are they more cost effective than a car, they’re fun and cool too!
And how do you cut back on the third of the Big Three, food? For a start, some online retailers offer a discount for repeat orders. To take advantage of this, make a list of items your household always uses then place a regular order with a discounting site. And when you eat out, take advantage of promotional deals, and stick to drinking tap water.
Aim to save a minimum of 25 percent of your income, by reducing your Big Three. This will drastically reduce the number of years it’ll take you to reach your savings target.
Proactively look for ways to optimize your nine-to-five paycheck, so you can reach financial independence sooner.
For many of us, the workplace is an island we visit five days a week. When we return to the mainland, we try not to think about it. Even if we love what we do, we want to spend our precious nonworking hours with our loved ones, and pursuing our passions.
This mindset is completely understandable. But when we see our jobs in a bubble, and not as part of our wealth-building strategy, we cheat ourselves of opportunities that support our financial goals.
The first place to look is your pension fund. It’s highly likely that your workplace will give you free money up to a specified amount, by matching any additional contributions you make to it.
But the benefits don’t end there. Whenever you add to your pension fund, that amount is taken out of your pay before tax. This reduces your overall taxable income. And since your pension fund is part of your assets, it also contributes to your savings target.
The second way you can optimize your paycheck is by asking for a raise. This can feel intimidating or even embarrassing. But if you approach your request in the right way, you can remove a lot of that discomfort.
Start by investigating what other companies are paying employees in your equivalent role. Online job advertisements will help you with this. Then, think about your perceived value to the company. Where do you take on responsibilities outside your role? What contributions have you made to company outcomes?
Once you’ve done your homework, choose your timing wisely. Your boss will be thinking about your value before a performance review, or at the end of a fiscal year when new budgets are being put in place. Present your request for a salary increase as a percentage, not an amount of money. Ten percent is far less tangible than $5,000, so your boss will be more likely to agree.
The third and final way to optimize your paycheck is to see if you can work remotely. This cuts out your commuting time and expenses, and gives you greater flexibility. According to the 2016 Gallup State of the American Workplace report, employees working remotely three-to-four days a week have the highest engagement levels. That means working from home benefits your company too.
Diversify your income by setting up side businesses.
Meet Matt, a full-time graphic designer based in Chicago. Matt loves his job, which pays $55,000 a year. But there’s more. At just 25, Matt’s on track to having $1.5 million saved by his 30th birthday. All thanks to the dog-walking business he set up, just three years prior.
As a cash-strapped student, Matt started charging dog owners $5 a walk. At first, he was only walking about ten dogs a week. But then more pooches moved into the neighborhood. He was so overwhelmed with business that he had to hire people to meet demand. Now, Matt has all the benefits that come with nine-to-five employment, plus a side business that brings him an extra $200,000 a year that he can save.
Having a side business is an essential part of achieving financial freedom. This is because no matter how good your day-job is, you’ll only ever be able to trade your time for a set income. But you, like Matt, can grow a side business that’s generating money with very little effort on your part – or in other words, passive income.
Be strategic when you’re choosing your side business. Since you’ll have to give up your leisure time to get your business off the ground, it helps if you like what you do. Find something that speaks to your interests and skills. This’ll make you more likely to stick with it.
Once you’ve come up with a concept, research your potential competition. When Matt started dog-walking, there were only a few other individual competitors in his neighborhood. Matt grew his clientele by offering customers a free walk for every client they referred.
If you find that there’s no competition, it might mean there’s no market demand for your product or service. Or it could mean you’ve hit upon a golden idea. Don’t be afraid to test the waters by launching your business and seeing if it takes. Most people have to try a few times before they find a business that works. Just keep your start-up costs to a minimum, so that the risk of losing money is low.
And don’t forget, to maximize your earning capacity, invest all the money you make from your side business into your investment account. This way you can accrue the maximum amount of compound interest.
Even the best financial strategy only works if you put it into practice.
Grant’s journey to financial freedom began with him realizing he had to do something different. But it’s no easy task to be a pioneer.
Grant lost his job in 2010, due to the recession. Before that, he had enjoyed boozy Saturday lunches with his friends, followed by a nap. But to reach his savings target, he had to cut these back to once every two-to-three months, and instead use the time for his side businesses.
When you decide to work toward financial independence, you’re choosing to go against the grain. Your family and friends might say that you don’t know what you’re doing, that you’re stupid for rejecting the advice most people follow. This can make you hesitate. But it’s crucial you jump right in.
If you’re going to free yourself from financial worries, you need to be brave enough to dive in and get started, even if you don’t think you’re ready.
Of course it’s natural to procrastinate when you’re making a big life change. There’ll always be another book you can read or course you can take before you begin. But for every day your money isn’t compounding, you’re losing wealth and increasing the years it will take to reach financial independence.
So, the best thing you can do is start. Start today by making an appointment with your HR Department, to talk about those contribution matching schemes. Or open a compounding investment account and make your first deposit, even if it’s just $100. If nothing else, just put aside an hour to mind-map business ideas. And don’t feel like you have to know everything before you start. The reality is, you’ll make mistakes. Everyone does. That’s part of the learning journey.
However you get started, you have to make sure you’re committed to playing the long game. It took five years for Grant to reach his savings target. It might take you longer, depending on your net worth and how lucrative your side businesses are.
Staying focused on your goal will mean saying no to lots of people, including your friends and your partner. But sacrificing those lazy weekends for a few years might buy you decades of free time in the future. Keep your eye on the prize. It’ll be worth it in the long run.
You won’t guarantee your financial future just by setting aside the standard 5 percent of your salary into a retirement fund. Even people on huge salaries fail to free themselves from work, by overspending or not investing wisely. And the rest of us slog away in cubicles, dreaming of a distant future when our time is our own. But everyone has the ability to start using money to its full potential, right now. Apply the lessons in this post to optimize what you earn, manage your spending, and invest in a way that ensures your ongoing financial security. This is the winning combination to gaining financial freedom.
Action plan: Set up a regular hangout to discuss financial strategy.
Talking about money is taboo in many communities. Most of us feel like money is a private matter that shouldn’t be discussed. But workshopping your financial strategy with others is a great way to learn about maximizing savings, and it can also be motivating. Why not set up a small group of family members and friends, and meet monthly to discuss financial strategy? This is a great way to swap notes, stay focused and remain accountable.
